UBS Trims Netflix Target On Mixed Subscriber Trends

By Teresa Rivas

UBS analyst Doug Mitchelson and his team have an update on Netflix (NFLX) Wednesday, and while they’re still bullish on the stock, they did lower their price target on mixed data on subscribers.

Netflix

Mitchelson reiterated a Buy rating on Netflix but lowered his target from $141 to $130. He writes that the firm’s analysis of downloads of Netflix App showed a softening in Southern Europe, France, and Germany, but consistency elsewhere, including strength in the U.S. and stability in the U.K., Australia and Japan. As such, he’s maintaining his estimate of 500,000 net additions in the U.S. for the second quarter (down from 903,000 adds in the second quarter of 2015) and 2 million international net additions (compared to 2.4 million in the year-ago period).

More detail from the note:

We lowered 3Q16 int’l net additions by 836k to 2.600m (-5% Y/Y) due to disruption in the U.K. from the Referendum and now expecting a much greater impact from the Olympics in August in Brazil (given our data is showing Brazil/Latin America is by far the leading contributor to Int’l growth). 3Q16 will also be challenged by carryover churn from the 2Q price increases, but benefit from seasonality and more original content released Y/Y. 4Q16 int’l was trimmed 164k to 3.891m (-4% Y/Y); 4Q faces tough S. Europe & Japan launch comps, but more original content releases. We also adjusted Fx, particularly for the negative Pound moves, hampering ARPU – see tables.

The set-up into 2Q results appears more favorable than recent qtrs given bearish sentiment, in our view. At the same time, outside an unexpected material 2Q/3Q subscriber beat, we would not expect expiration of the well-established bear case, which is: (1) the U.S. is mature; (2) Int’l low hanging fruit has been picked; (3) vertically integrated studios will stop selling content to NFLX; and (4) its original content strategy is unproven and expensive. We believe: (1) content fears are misplaced (we updated our content tracking in this report, and would note Disney Pay1 movies starting this Sept, 4Q16′s The Crown and another 50% originals increase in 2017); (2) int’l growth prospects remain robust (core has not slowed, skim market conversions coming); and (3) a 4Q16 ARPU/margin ramp will provide evidence of earnings ramp potential.

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